Aged old question on Income vs Capital

Typical question

This is like the typical tax law question in the tax exam. When it involves the word “law”: it involves argument, justification and supporting evidence. 

Yardsticks

In tax law, we have this very important yardstick to measure whether it is income or capital. This is the forte for Dr Choong. He is an expert and loves this area of tax. 

Lawyers vs consultant

It is especially fun to hear how tax lawyers lay down their arguments in tax cases. I think it is way more intense and solid compared to a tax consultant. Largely due to mindset and ability to present a case. 

The weird and bizarre case

Frankly, I have read some tax cases which are highly bizarre, self-contradictory and substandard. The solicitor and the judge of the case lack concrete knowledge of tax law. 

The crown jewels

While some others are mesmerising, eye-opening and exciting to learn from. Those will usually end up being the landmark cases we come across in the tax books. 

If you are a tax professional or tax student, do find the opportunities to read them. Yes, they are long and sometimes filled with legal jargon. 

Go beyond jargons

Go beyond the hurdle of legal jargon they are there for legal procedures purposes. Zoom your eyes on the issues presented, the argument in their favour and how the solicitor presented their argument and how the judge conclude them. It is more exciting than reading fiction.

Just like reading a book, you don’t have to do an author to read a book. Similarly, you don’t need to be a tax solicitor nor a legal or tax professional to appreciate good tax cases. 

The Prize

Frankly income and capital are highly popular debates when it comes to property. Here’s why: 

If Income wins then it will fall under the ambit of income tax.  

Otherwise, it is an investment, it will be treated as Capital and fall into Real Property Gains Tax (RPGT). Especially now that with Budget 2022 RPGT is exempted on property held six years or more. The tax authority will usually try to argue that it falls under Income Tax. 

Generally, taxpayers would prefer capital for assets with longer-term, income tax if it is a loss-making item.

Know which side of the fence

When I was a tax junior Dr Choong once sternly questioned me ” are you working for the tax authority to the client?”. That’s when I was looking at a client case and I was telling him that I don’t think the client has a case. It took a while for me to truly appreciate this. 

Glimpse, perspective

That was many moons ago way before Dr Choong became a fully qualified solicitor and before I studied law. It is a huge lesson learnt as a junior. It is a glimpse into the mind of how a real tax expert sees the world and I believe is the secret to how he manages to win so many cases. 

Balance of probability

It stikes me to always look at things from the client’s side of the fence. In civil cases, we are measured on the yardstick of the balance of probability. 

The balance of probability standard means that a court is satisfied an event occurred if the court considers that, on the evidence, the occurrence of the event was more likely than not.

There are many ways to argue for or against a case. We can build on our ground for capital, at the same time we can build on the ground why it is not income. 

On the more defensive ground, we then shift to the opposition side, to see what position they will take and try to strategise ground to corner them. 

Mindset shift

For me, that’s the spirit of the law. Especially after I completed my LLB. Venturing beyond tax, seeing the common ground different territory of law. One common ground: there will always be grey areas, that’s why solicitors and lawyers are called for. 

In every case, there are no absolute right or wrong. There will only be a relative strength and the better-skilled are more likely to win. Such skills come with lots of sweat and hard work. Studying cases, going through the thinking process. 

Creativity and the ability to spot unthought-of angles are not gifted, it is trained. It doesn’t come easy. But is surely satisfying and moving. 

Conclusion

It is fun for the very reason that it is a discovery journey to spot grounds that help the client to win by moving this scale called the balance of probabilities. 

Further reading

PS: If you are interested to see the common GROUNDs used to argue for income or capital. Technically it is called the “Badges of trade”.